(Yicai) Sept. 13 -- China’s five-year business outlook looks mixed to US firms operating in the country, as some industries are picking up but economic pressures and uncertainty over the China-US relationship are weighing on optimism, according to the findings of a new survey.

About 47 percent of the 306 companies surveyed by of the American Chamber of Commerce in Shanghai are upbeat, down from 52 percent a year earlier, according to the annual China Business Report published by the organization yesterday. Thirteen percent ranked China as their top investment destination. Both figures are the lowest since the survey began in 1999.

Only 66 percent were profitable last year, another record low, though half had higher revenues than in 2022, with retailers outperforming manufacturing and services sector businesses.

“We all expected a stronger rebound," Allan Gabor, chair of AmCham Shanghai, said in an interview with Yicai. "It hasn't necessarily materialized in all areas, but there are some bright spots.”

Some AmCham Shanghai members in automotive, healthcare and pharmaceuticals, and retail and consumer industries “have done quite okay,” Gabor said. “They are rebounding."

In addition, 40 percent of companies reported better operating margins for 2023, up from 37 percent the year before, according to the report. Around 54 percent expect revenue growth this year.

The percentage finding improvement in government policies and regulations towards foreign companies over the past year rose to 30 percent from 22 percent, while 35 percent said China's regulatory environment is transparent, up from 33 percent. And about 31 percent said enforcement of intellectual property rights has improved.

“It's hard to explain China in such a short time,” noted Gabor, who has lived in the country for almost 30 years, working at Pfizer, Merck, and other US firms. “The reality is China is very resilient. I’ve seen other cycles. I've seen the financial crisis. I've seen SARS in 2003. I was here in Shanghai for the Covid experience.

"I've also seen many great times across my tenure in China where regardless of the company I was with, we were able to build strong teams in the pharmaceutical and the electronics industry and do quite well,” he said. “This is a second home for me, so I'm optimistic.”

Geopolitical Tensions

Geopolitical concerns remain paramount for US firms in China, according to the report. Sixty-six percent named the bilateral relationship their top challenge, while 70 percent said geopolitical tensions are the biggest hurdle to China's economic growth.

“Despite geopolitical headwinds, both the US and Chinese governments have made significant efforts to stabilize bilateral ties,” Gabor said in the report. “Building on the progress made at the summit between Presidents Biden and Xi last November, there have been many visits between the two countries by officials on a central and subnational level.”

Regarding the upcoming US presidential election, Gabor said that tariffs will remain a major tool in the trade policy toolbox, but the scale and scope may differ between administrations.

De-Risking

Although 40 percent of the survey’s respondents are rerouting investments originally destined for China, including to Southeast Asia and India, fewer are relocating operations out of the country compared with last year. In addition, 32 percent picked producing or sourcing goods or services in China for the world as their top strategy, up from 23 percent a year earlier.

Many companies that invested in Southeast Asia came across issues, including cultural differences and the local infrastructure environment, with some ultimately choosing to return, Eric Zheng, president of AmCham Shanghai, told Yicai.

Although many firms have proposed a ‘China + one strategy,' popular alternatives such as Vietnam or India cannot provide the same manufacturing ecosystem as China, Zheng noted. "They may be able to take on a small portion of production, but they can't accommodate the entire supply chain."

Companies operating in China should focus on "smart localization," Gabor said. "You may actually want to deepen your localization to make yourself more robust, to be less susceptible to imports coming from anywhere else.

“The other dimension would be your organization," he said. "Here we found the China teams to be highly capable, highly resilient during the pandemic, and they really gained a lot of credibility in headquarters.

“These are teams that we can further empower, give them more autonomy to help them manage the business,” according to Gabor. "They're the closest to the dynamics of the Chinese economy, decision-makers, and customers. So, my advice, too, would be to consider further empowering the local team.”

“Many members have spent decades building their brands in China,” Gabor said in a press release to accompany the report. They “must now manage a changing environment that may require them to make tough near-term decisions as they adjust their businesses to navigate new market and geopolitical dynamics.”

Editor: Martin Kadiev